The End of Software Patents?

On December 6, the Supreme Court granted certiori to review CLS Bank Int’l v. Alice Corp. Pty. Ltd. to determine the patent eligibility of computer-implemented methods and systems.[1] The Court will address whether claims to computer-implemented inventions, which include claims to systems and machines, processes, and items of manufacture, are directed to patent-eligible subject matter within the meaning of 35 U.S.C. § 101,[2] which specifies four independent categories of inventions or discoveries that are eligible for patent protection: processes, machines, manufactures, and compositions of matter.[3] In other words, the Court will determine whether or not many types of inventions involving the use of computers, particularly software innovations, are per se ineligible for patent protection because they are abstract ideas,[4] a judicially derived exception to section 101’s broad patent-eligibility principles.[5] While the Supreme Court could invalidate hundreds of thousands of computer implemented claims, including claims for business methods, financial systems, and software patents, if it were to interpret section 101 to preclude these types of claims, the Court will likely not do so but will instead clarify the standard for determining patent eligibility for such inventions in such a way that will ultimately reduce the number of patents granted to such inventions and invalidate some patents that have already been issued involving the use of computers.
In May, the Federal Circuit, sitting en banc, in a particularly fractured decision, affirmed in a conclusory “per curiam,” i.e., an appellate ruling in which the decision is made by a majority of the court acting collectively without identifying the individual judge authoring the opinion, the patent ineligibility of Alice Corporation’s method and computer-readable media claims. The court also affirmed that the asserted systems claims were also not directed to patent-eligible subject matter under section 101.[6] This opinion was followed by six other opinions, including two by Chief Judge Rader, and separate opinions by Judges Lourie, Moore, Newman, and Linn.

Facts and Procedural History
Alice Corporation owned four patents, all of which concerned “the management of risk relating to specified, yet unknown, future events.”[7] The patents concerned “a computerized trading platform used for conducting financial transactions in which a third party settles obligations between a first and a second party so as to eliminate ‘counterparty’ or ‘settlement risk.'”[8] In other words, the patents provided for a form of escrow in which a trusted third party is used “to verify each party’s ability to perform before actually exchanging either of the parties’ agreed-upon obligations.”[9] The claims at issue comprised method claims, system claims, and media claims. In 2011, a district court had granted a motion for summary judgment by CLS Bank International, an accused infringer that sought a declaratory judgment that Alice Corporation’s patents were invalid or not infringed. The district court determined that the asserted claims were invalid for lack of patent eligible subject matter as a matter of law, and Alice Corporation appealed.[10]

Holding

With respect to the system claims, the judges split five to five, with Judges Lourie, Dyk, Prost, Reyna, and Wallach (the “Lourie Group”) affirming the lower court’s decision and the other five judges dissenting, thereby affirming the district court’s decision invalidating the system claims. Chief Judge Rader’s opinion, which was joined by Judges Moore, Linn, and O’Malley, asserted that the systems claims were patent eligible. Judge Newman agreed that the claims were patent eligible, but she provided a different rationale. With respect to the method and media claims, the Lourie Group found that the claims were patent ineligible, a determination with which Chief Judge Rader and Judge Moore concurred in Part VI of the Rader opinion. Two of the four judges, Judges Linn and O’Malley, declined to join this part of the Rader opinion, as they argued that all the system, method, and media claims were patent eligible, a view also asserted by Judge Newman. No opinion commanded a majority in regard to the rationale for invalidating the method and media claims,”[11] although a majority did agree on the invalidity of the method and computer media claims and that all the claims “should rise and fall together in the section 101 analysis.”[12]

The System Claims

The Lourie Group found the system claims to be patent ineligible, but Judges Rader, Moore, Linn, O’Malley and Newman determined otherwise. The Lourie Group noted that when section 101 issues arise,
the same analysis should apply regardless of the claim format: Does the claim in practical effect, place an abstract idea at risk of preemption? And, if so, do the limitations of the claim, including any computer-based limitation, add “enough” beyond the abstract idea itself to limit the claim to a narrower, patent eligible application of that idea? Or, is it merely a Trojan horse designed to enable abstract claims to slide through the screen of patent eligibility?[13]
Finding that the limitations provided “no significant ‘inventive concept'” and were instead “akin to stating the abstract idea of third-party intermediation and adding the words: ‘apply it’ on a computer,” the Lourie Group found the claims patent ineligible. [14]
Judges Rader, Moore, Linn, and O’Malley, however, determined otherwise. Rader’s opinion argued that claim 26 of the ‘375 Patent covered “the use of a computer and other hardware specifically programmed to solve a complex problem”[15] and was “limited to an implementation of the invention that includes at least four separate structural components: a computer, a first party device, a data storage unit, and a communications controller coupled via machine components to the computer and the first party device.”[16] Moreover, the claim created an additional limitation on the system “by requiring a structural configuration that ‘receive[s],’ ‘electronically adjust[s],’ and ‘generate[s]’ according to the specific requirements of the system.”[17] With respect to the ‘720 patent, the Rader opinion concluded, the claims did not claim “only an abstract concept without limitations that tie it to a particular application.”[18] The claims required a machine and the steps were “not inherent in the process of using an escrow” because “[o]ne can conduct an escrow without a data processing system that includes a data storage unit coupled to a computer which has been modified by software to receive transactions, adjust records, and generate electronic instructions according to specific structural limitations in both software and hardware formats.”[19] Thus, the abstract idea was “integrated into a system utilizing machines” and therefore patent eligible.[20]
In a separate opinion, Judge Newman argued that the patent claims were eligible because section 101 “is not the appropriate vehicle for determining whether a particular advance is patentable. . . .”[21] She argued that the court should hold that section 101 is “an inclusive statement of patent-eligible subject matter,” that the “form of the claim does not determine section 101 eligibility,” and that patents do not prevent experimental use because study and experimentation are not infringement.[22]

The Method Claims

The Lourie Group, along with Chief Judge Rader and Judge Moore, argued that Alice Corporation’s patent claims were patent ineligible. For the Lourie Group, the Supreme Court’s decisions required the court to ensure that patents do not “preempt the fundamental tools of discovery[.]”[23] Consequently, “a patent-eligible claim must include one or more substantive limitations that, in the words of the Supreme Court, add ‘significantly more’ to the basic principle, with the result that the claim covers significantly less.”[24] The Lourie Group also determined that Supreme Court precedent required the court to refrain from adopting bright-line rules regarding subject-matter eligibility and instead adopt “a flexible, claim-by-claim approach to subject-matter eligibility that avoids rigid line drawing.”[25]

The Lourie Group offered the following analysis to determine “whether a computer-implemented claim recites patent-eligible subject matter under section 101 or falls within the common law exception for abstract ideas.”[26] First, does the claimed invention fit within one of the four statutory classes set forth in section 101, i.e., a new and useful process, machine, manufacture, or composition of matter or improvement thereof?[27] Second, if it does, does the claim fall within a judicial exception?[28] This is initially determined by a preemption analysis of whether the claim poses a risk of preempting an abstract idea.[29] If not, what is the abstract idea at risk of preemption?[30] This question may require a claim construction analysis while evaluating the threshold test of whether the claims are subject-matter eligible.[31] Third, does the claim contain “additional substantive limitations that narrow, confine, or otherwise tie down the claim so that, in practical terms, it does not cover the full abstract idea itself” (the “inventive concept” test)?[32] That is, is the fundamental concept represented in the claim a “product of human ingenuity” that represents “more than a trivial appendix of the underlying abstract idea[?]”[33] The Lourie Group noted that all issued patent claims receive a statutory presumption of validity.

Using this analysis, the Lourie Group found that the substantive limitations of a representative method claim, claim 33 of the ‘479 patent, did not add significantly more than the underlying abstract idea for several reasons. First, the requirement for computer implementation was not specifically introduced because it lacked “any express language to define the computer’s participation.”[34] Even if the computer functionality made the process occur more quickly or more efficiently, they argued, the concept was still abstract.[35] Furthermore, using the terms “shadow record” in the claim did not disguise the fact that the claim recited a “basic function required of any financial intermediary in an escrow arrangement—tracking each party’s obligations and performance.”[36] Finally, the Lourie Group determined that “providing end-of-day instructions to the exchange institutions to reconcile the parties’ real-world accounts with the day’s accumulated adjustments to their shadow records is a similarly trivial limitation that does not distinguish the claimed method.”[37]

Judges Rader and Moore also found that the claims were patent ineligible, but they argued that courts must employ a different analysis, one which presumably would find more patents eligible than the Lourie Group’s framework would. For Chief Judge Rader and Judge Moore, the “relevant inquiry is whether a claim includes meaningful limitations restricting it to an application rather than merely an abstract idea.”[38] Preemption is only a concern if a claim “preempts all practical uses of an abstract idea.”[39] A claim “is meaningful limited if it requires a particular machine implementing a process or a particular transformation of matter.”[40] It will also be meaningful limited if it “recites added limitations which are essential to the invention.”[41] For Chief Judge Rader and Judge Moore, the “key to this inquiry is whether the claims tie the otherwise abstract idea to a specific way of doing something with a computer, or a specific computer for doing something; if so, they likely will be patent eligible, unlike claims directed to nothing more than the idea of doing that thing on a computer.”[42] Whereas the Lourie Group asserted that adding a computer to perform operations a human could do (albeit faster and more accurately) would not suffice to make the claims eligible, Chief Judge Rader and Judge Moore maintained otherwise.[43] For them, the Supreme Court’s reference to “inventiveness” was an inquiry into whether “implementing the abstract idea in the context of the claimed invention inherently requires the recited steps.”[44]

Analyzing claim 33 of the ‘479 Patent, which Chief Judge Rader and Judge Moore found representative of the method claims, they first investigated whether the invention claimed a statutory subject matter, and they found that it did because it claimed a “process.”[45] Therefore, the next prong of the analysis was to determine if there was clear and convincing evidence that the claim fell within a judicial exception. Chief Judge Rader and Judge Moore next proceeded to analyze whether the claim is abstract. Finding that it was, they then evaluated whether the steps are inherent in an escrow so that it was claiming not “a practical application of the concept of an escrow” but rather the abstract concept of an escrow.[46] They found that each of the claimed steps were recitations of steps inherent in the concept of an escrow, using a third party intermediary as an escrow, and thus found the claims patent ineligible.[47] Chief Judge Rader and Judge Moore noted that the method claims did not mention a computer, and this factor seemed highly probative because the claim only implicitly referred to a computer implementation without providing more specific detail.[48]

Judges Linn and O’Malley, however found that the method claims were patent eligible. They focused on the procedural posture of the case. Although they noted that claim construction is a question of law that is reviewed de novo, they asserted that the court must still conduct a “review” that is premised on a record in which all relevant claim construction issues were examined and the parties had an opportunity to offer evidence that would play a role in the claim construction process, a review that was never performed by either the district court or the Federal Circuit.[49] Examining the claims, they determined that the method claims were patent eligible because the trial court “conceded that there was meaningful support in the written descriptions of the ‘479 and ‘510 patents to determine that the claims required all the computer-implemented limitations of the system claims.[50] Given that there was not a record upon which the appellate court could come to a different conclusion, they determined that the court could not find the claims patent ineligible.[51] Moreover, they found that the claims were not unduly preemptive if all the computer-based limitations in the written descriptions applied because such claims did not preempt all commercial uses or applications of the escrow idea.[52]

Judge Newman also found that the method claims were patent eligible, but she did not join the Linn and O’Malley opinion. For Judge Newman, section 101 has created an independent source of litigation, one that created a disincentive to inventors and competitors because of the uncertainty and high cost of resolution because of the multitude of incompatible standards.[53] Judge Newman argued that the court should “return to the statute, and hold that when the subject matter is within the statutory classes in section 101, eligibility is established.”[54]

The Media Claims

As Judge Lourie noted in his opinion, claims 39-41 of the ‘375 patent, the computer media claims, were so called “Beauregard claims,” i.e., claims named for In re Beauregard.[55] Such claims “formally recite a tangible article of manufacture—a computer-readable medium, such as a computer disk or other data storage device—but such claims also require the device to contain a computer program for directing a computer to carry out a specified process.”[56] Notwithstanding their Beauregard format, Judge Lourie argued that Alice Corporation’s “computer readable medium claims” were equivalent to the method claims for purposes of section 101.[57] Because they were essentially method claims cast in the form of a physical device, i.e., a “computer readable storage medium,” they could not “overcome the Supreme Court’s warning to avoid permitting a ‘competent draftsman’ to endow abstract claims with patent-eligible status.”[58] All of the other judges found equivalence between the media claims and method claims in respect of the section 101 analysis.

Effect of the Case

The Supreme Court has decided to intervene to resolve the split within the Federal Circuit. The difficulty arises because of the lack of clarity of the judicial exceptions that have been read into section 101 in Bilski v. Kappos[59] and Mayo Collaborative Services v. Prometheus Laboratories, Inc.,[60] and because of Congress’s unwillingness to interpret section 101 of the Patent Act with respect to computer implemented system, method, and media claims. In fact, in section 18(e) of the 2011 America Invents Act, Congress specifically avoided interpreting section 101 patent eligibility with respect to such claims.[61] It seems unlikely that the Supreme Court will create a bright-line rule declaring computer software patent ineligible subject matter because the effect of doing so would measure in the billions of dollars. But given that the Supreme Court invalidated the claims in Bilski, which involved software claims, and the claims in Mayo, which did not,[62] it appears likely that the Court will provide guidance on how courts should conduct the section 101 analysis that will ultimately limit the patent eligibility of many inventions involving the use of a computer and invalidate some of the patents that have already issued for such inventions.

717 F.3d 1269 (Fed. Cir. 2013).

Section 101 of the Patent Act of 1952 (Patent Act), 35 U.S.C. §§ 1-376 (2006 & Supp. V 2011) provides: “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. § 101 [hereinafter Section 101]. Section 101 is only a threshold test for patent eligibility, however. The claimed invention must also satisfy the other conditions and requirements of the Patent Act for patentability, which include that the invention be novel, see section 102, nonobvious, see section 103, and fully and particularly described, see section 112. In Bilski v. Kappos, 130 S. Ct. 3218, 3225 (2010).

In Bilski, the Supreme Court significantly narrowed the eligibility of business method patents implemented in software when it held that a business method patent for a procedure for instructing buyers and sellers how to hedge against the risk of price fluctuations in the energy market was an abstract idea that was unpatentable because the claims did not require a computer and were not sufficiently tied to a specific real-world implementation. See Bilsky, 130 S. Ct. at 3230. The Court reasoned that allowing a patent applicant “to patent hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.” Id. at3231. The Court, however, did not accept that so-called business method claims should be categorically excluded from patent eligibility, found that a machine tie is not required for a method claim to be patent eligible, and determined that the “machine-or-transformation” test is not the exclusive means for determining whether process claims are eligible for patentability. Id. at3227-29. Thus, the Court did not provide a bright-line test for what constitutes an abstract idea. Bilski’s holding was not directly controlling in CLS Bank since the claims in CLS Bank were method claims limited to computer implementation, system claims, and computer media claims, whereas the method claims in Bilski were not limited to computer implementation. Donald S. Chisum, Patents on Computer-Implemented Methods and Systems: the Supreme Court Grants Review (CLS Bank) Background Developments and Comments 1, 29 (Dec. 10, 2013), http://www.chisum-patent-academy.com/wp-content/uploads/Supreme-Court-on-Computer-Software-Patents-1.pdf[hereinafter Chisum].

Id. Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S.Ct. 1289, 1294, 182 L.Ed.2d 321 (2012). The Mayo decision provided an analytic framework that required an analysis of “(1) whether a claim is drawn to a law of nature, natural phenomenon, or abstract idea, (2) whether the claim adds steps that are more than “well-understood, routine, conventional activity previously engaged in by researchers in the field”, and (3) whether the claim “risk[s] disproportionately tying up the use of the underlying natural laws, inhibiting their use in the making of further discoveries.” Chisum, supra note 5, at 29. Different judges on the Federal Circuit have interpreted the Mayo decision’s use of the terms “preemption” and “inventive concept” differently. In Mayo, the Court stated: [Supreme Court precedents] warn us against interpreting patent statutes in ways that make patent eligibility ‘depend simply on the draftsman’s art’ without reference to the ‘principles underlying the prohibition against patents for [natural laws].’ Flook, [437 U.S.] at 593. They warn us against upholding patents that claim processes that too broadly preempt the use of a natural law. Morse, [56 U.S.] at112-120; Benson, [409 U.S.] at 71-72. And they insist that a process that focuses upon the use of a natural law also contain other elements or a combination of elements, sometimes referred to as an ‘inventive concept,’ sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the natural law itself. Flook, supra, at 594; see also Bilski, supra, at ___, 130 S. Ct. 3218, 3225,(‘[T]he prohibition against patenting abstract ideas “cannot be circumvented by attempting to limit the use of the formula to a particular technological environment” or adding “insignificant post solution activity” ‘ (quoting Diehr, supra, at 191-192)). Mayo, 132 S. Ct at 1289.

CLS Bank, 717 F.3d at 1281.

Id. at 1282.

Id.

Id.

See id.

See id.

See CLS Bank, 717 F.3d at 1282.

Id. (citations omitted).

Id. at 1283.

Id. at 1286.

Id

CLS Bank, 717 F.3d at 1287.

Id

Id. at 1299.

Id. at 1300

Id. at 1301.

Id.

CLS Bank, 717 F.3d at 1302.

Id. at 1286; id. at n. 7.

Id. at 1303.

Id. at 1311.

CLS Bank, 717 F.3d at 1311.

Id. at 1312.

Id

Id. at 1331.

Id. at 1332.

CLS Bank, 717 F.3d at 1332.

Id.

See id. at 1321.

Id. at 1326.

Id. at 1287 (citing In re Beauregard, 53 F.3d 1583 (Fed. Cir.1995)).

CLS Bank, 717 F.3d at 1287.

Id. at 1288.

Id

130 S. Ct. 3218 (2010).

132 S. Ct. 1289 (2012).

Chisum, supra note 5, at 58.

Mayo’s claims involved a method used in a diagnostic test to correlate the level of thiopurine metabolites of a drug in a patient’s blood and the drug’s efficacy and toxicity so that doctors could determine whether a given dosage level is too low or too high. See Mayo, 132 S. Ct. at 1293.